AAIG'S MACRO PULSE #17
Written by Jochem Verzijl
Welcome back everyone. One week, but a lot to work through. The July jobs report on Friday came in the weakest of the year and slightly rewrote the Fed conversation overnight. Japan pulled the US into a coordinated yen intervention on Monday, which marks the first joint action of its kind since 2022. That exposed how tightly the Treasury market is now tied to Tokyo. Q2 earnings hit their peak week. The hyperscalers delivered strong profits and higher capex guidance at the same time. The Iran picture kept doing what it has been doing after Trump’s weekend climbdown. And oil settled back into the $80 to $85 range, with markets trying to decide whether the war is finally coming to an end or just catching its breath. Let’s take it piece by piece.
1) KEY METRICS / DATA POINTS
Let’s start with the jobs report on Friday. It was the print of the week and it slightly rearranged the conversation around the Fed. Nonfarm payrolls fell by 23,000 in July, well below the 83,000 consensus. That was also below every forecast on Bloomberg. Unemployment ticked down to 4.1% from 4.2%, but only because 264,000 people dropped out of the civilian labour force. Participation fell to 61.4%, the lowest in over five years. Wage growth softened to 3.2% annually, the weakest since May 2021. And here is the number that matters most: May and June payrolls were revised down by a combined 103,000. The three-month picture is meaningfully worse than the earlier headlines told us. Local government education shed 50,000 jobs. Retail lost 19,000. Health care kept adding. Private-sector payrolls rose 30,000, offsetting a 53,000 government decline.
This labour market has stopped softening at the edges. The three-month average of payroll gains has fallen to 35,000, which is below where most economists put the break-even rate. The reason unemployment did not spike is that the labour force is shrinking almost as fast as employment. Immigration curbs and demographic drift are doing most of that work.
Now Japan, which was the more surprising development of the week. On Monday August 3, the US Treasury and the Bank of Japan carried out their first coordinated yen-buying intervention since 2022. The trigger was renewed yen weakness against the dollar. The deeper worry was Japanese government bond yields spilling straight into US Treasury markets. The 10-year JGB yield touched 2.82% during the week before pulling back on the Iran news. The Ministry of Finance confirmed access to the Fed’s FIMA repo facility at the same time, which lets Japan raise dollar liquidity without dumping Treasuries. The message is that Washington no longer treats Japan’s currency and bond markets as a purely Japanese problem. They are firmly a US concern too. A persistently weak yen risks forcing Japanese institutional investors to unwind their roughly $5 trillion in foreign assets. That unwind would land primarily in US Treasuries at exactly the moment the long end is already under pressure.
Q2 earnings passed their peak this week. S&P 500 profit growth is running near 37.9% year-on-year, with 61% of the index reported and 64% of those beating consensus by more than one standard deviation. Strip out one-time gains from big tech stakes and EPS still grew 26%. That is the strongest since 2021. AI infrastructure companies accounted for roughly a third of that gain. The hyperscalers were the story. Alphabet raised its 2026 capex guidance to $195-205 billion. Combined hyperscaler capex is now projected at $760 billion this year, up from $750 billion just weeks ago. Amazon delivered a clearer capex-payback framework than expected and the market rewarded it. Microsoft delivered strong Azure growth. Meta was punished for what looked like capex discipline, which tells you something about the current mood. Alphabet’s Q2 capex alone came in at $44.9 billion, more than double a year earlier. Free cash flow swung to negative $5.9 billion even as operating income hit $40.8 billion.
The RIA Advisors analysis making the rounds this week gave the hyperscaler dynamic a number worth sitting with. In 2026, the five biggest hyperscalers will spend roughly $760 billion on AI infrastructure. They will expense only $211 billion. The other $549 billion is capitalised and sits on future income statements as depreciation. Combined net income across the five is projected to rise 25% this year to about $506 billion. Combined free cash flow is projected to fall 91% to roughly $16 billion. The market is being asked to trust that the revenue this capex generates will arrive fast enough to absorb the depreciation drag when it lands.
On Iran, the pattern from the summer held. Trump’s weekend post cancelling the strike gave way to renewed Omani-mediated negotiations. Oil settled in the $80 to $85 range. WTI was around $81 by Friday. Brent near $85. There were no major strikes in either direction this week. That is the closest thing to peace we have seen since the July 8 collapse. Whether it lasts is the question.
The Fed is still 3.50% to 3.75%, so it did not move. What changed was the market pricing around September. Before Friday’s jobs report, markets had roughly 42% odds of a hold in September, with the rest split between hikes and other actions. By Friday afternoon, cut odds had risen sharply. Several bank strategists moved cuts to their base case. The tension between an inflation problem and a labour market that has clearly stopped growing is now sharp enough that the September decision looks meaningfully different than it did a week ago.
2) AAIG’S PERSPECTIVE
We want to walk through what all this means together. These threads connect in ways that get lost if you look at each release on its own.
The jobs report is what changes the near-term Fed calculus. For most of 2026, the Fed has been fighting an energy-shock inflation problem while the labour market held up well enough to justify caution on cuts. That story is no longer available with the recent releases. A negative payrolls print, a three-month average of 35,000, and downward revisions of 103,000 clearly shows the cracks in the labour market. The dual mandate is now visibly pulling in two directions. Inflation is still elevated and Tuesday’s CPI will likely show it moving higher on the reversal in energy. Unemployment is being held down artificially by a shrinking labour force. Immigration policy is now the swing variable. If the labour force stops shrinking, the unemployment rate will rise mechanically, and it will look worse in a hurry.
Markets have responded by pricing in more cuts. We would be careful about drawing a straight line from Friday’s weak print to a September cut. There is a distance between what markets want and what Warsh can actually deliver. He has three hawkish dissenters on his committee who voted for a hike two weeks ago. Cutting in September, against that internal opposition, with headline inflation likely printing above 3.5% on Tuesday, would be a big move for a chair still in his first six months. The more realistic path is that Warsh signals openness to cuts if the data continues in this direction, holds September, and starts positioning for October or December. Market pricing may be running ahead of what the Fed can actually do without cracking internal consensus.
The Japan intervention is a slower burn but potentially the more consequential development over the medium term. The US does not run joint currency interventions casually. This happens when Washington believes a foreign country’s monetary and fiscal choices are directly threatening US financial stability. What is different this time: the US worry is not really about the yen. It is that a weak yen and rising JGB yields together could force Japanese institutions to sell US Treasuries at scale. Japan owns roughly $1.1 trillion in Treasuries. If yen weakness accelerates and JGB yields keep climbing, some of that could get forced back home. The FIMA repo access is designed specifically to prevent that outcome. That tells you exactly what Washington is worried about.
For US investors, the practical concern is that the long end of the Treasury curve is now vulnerable to developments that are not fully within US control. If the BOJ hikes further, or if Prime Minister Takaichi pushes ahead with an aggressive fiscal package this autumn, US 30-year yields can move higher regardless of what the Fed does. That is a real risk to duration positioning. It has been building all year without getting proportionate attention.
The Q2 earnings picture is more layered than the headline numbers make it look. 37.9% profit growth is a strong result. Cloud revenue at the hyperscalers is real evidence that AI capex is beginning to translate into revenue. The free cash flow dynamic is worth sitting with though. Capex at this scale, spread over multi-year depreciation schedules, makes current earnings look stronger than the cash reality. The gap between $760 billion of AI capex being deployed in 2026 and $211 billion being expensed this year is real. Eventually it shows up either as compressed earnings, if depreciation lands before revenue catches up, or as sustained earnings, if the revenue does arrive in time. Which one materialises will determine a lot about equity returns over the next two to three years. Nobody knows the answer with confidence right now.
What we do know: this is not an argument about whether AI is real. AI is real. Cloud revenue is real. Productivity gains are showing up in specific sectors already. The question is whether the pace of capex deployment is calibrated to the pace of revenue realisation. Hyperscaler management teams sound confident. Investors are starting to ask whether that confidence is calibrated correctly, or whether it is a habit built up over a period where nobody got penalised for spending too much on AI. Alphabet’s post-earnings weakness on the $200 billion capex guidance is the first sign the market is beginning to price this discipline question.
The link between all three (earnings, Japan, jobs) runs through the same variable: term premium in the long end of the curve. Weak jobs strengthen the case for Fed cuts and would normally pull yields lower. Hyperscaler capex financed through equity and debt issuance adds Treasury supply pressure. Japan intervention exposes the risk that Japanese buyers may not be there for that supply. The AI boom, the labour softening, and the Japan situation are all being resolved through the same channel. None of the resolutions is clean.
On Iran, the market’s willingness to hold oil in the $80 to $85 range this week is the closest thing to a vote of confidence in the diplomatic process we have seen since June 17. It is a conditional vote. It depends on the Omani channel producing something concrete in August, either an IAEA access agreement or a formal reopening protocol for the strait. Without one of those, the pattern that has held all summer, talks, breakdown, oil spike, private climbdown, talks resume, will repeat. The base case is that the cycle continues into September and possibly through Jackson Hole. A real resolution requires one of the two sides to accept a compromise neither has been willing to offer so far.
3) WHAT TO WATCH
Three things over the next two weeks will shape everything else.
The first is the July CPI release on Tuesday August 12. This is the last major inflation print before the September FOMC meeting. Gasoline reversed sharply in July, so headline CPI will move higher than the 3.5% June print. Somewhere in the 3.8% to 4.0% range is the reasonable range. Core CPI is the number that matters. If it prints at 0.2% or 0.3% monthly, the case for holding in September stays intact even with the weak jobs report. If core comes in at 0.1% or flat, the case for a September cut gets much harder to resist. We expect core to firm up modestly rather than moderate further, based on the shelter and services trends. In that scenario, the Fed is genuinely caught between the two sides of its mandate.
The second is Jackson Hole on August 27-29. This is Warsh’s first appearance at the annual symposium as chair. He has been consistent about not providing forward guidance. The labour market data may force his hand anyway. If he uses Jackson Hole to explicitly acknowledge that the labour market has weakened enough to warrant policy action, markets will price a September cut as near-certain. If he holds his line and reiterates data dependence, September stays open and the CPI print becomes the pivot.
The third is whether Japan’s intervention holds. The yen strengthened sharply on Monday and has stayed off its lows through the week. JGB yields pulled back on the Iran news. The underlying pressure has not been resolved. Takaichi is expected to push a fiscal expansion package in the autumn. If the BOJ does not hike rates in response, the intervention will need to be repeated. A second coordinated intervention within the next month would be a signal that the situation is deteriorating faster than policymakers can manage. If Japan and the US can hold the yen at current levels through August without further action, some of the Treasury market pressure will ease.
The thread across all of this is that the interconnections between markets, geographies, and policy tools are tighter than they have been in years. A jobs miss in the US moves Fed pricing. Fed pricing moves Treasury yields. Treasury yields move the yen. The yen moves Japanese institutional flows. Those flows move Treasuries again. Every one of these variables is in motion at the same time. Each has a real capacity to surprise. Hyperscaler capex, oil, and Iran sit on top. The market is not currently pricing any of them individually as dangerous. The risk we care about is not any single one going wrong. It is two or three going wrong together, and the interactions becoming the story.
That does not mean disaster is coming. It means the range of plausible outcomes is wider than at any point since March, and the tails are fatter than the current implied volatility in equities suggests. Position accordingly.
Small reminder: July CPI release on August 12!
Thanks for reading this 17th pulse, and see you at the next one!
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